The Royal Mail share price is up a little over 70% in the last six months. As good a result as this is for those that bought at the height of the Covid-19 market crash, I still can’t be tempted to invest.
Royal Mail share price: finally delivering
There are a few reasons why investors appear to be taking a fresh look at Royal Mail. First, you have the recent half-year results.
As a result of shoppers moving online during lockdown (and thus needing their purchases delivered), a 10% rise in revenue was recorded in the six months to 27 September. The company also raised its forecasts on revenue for the full financial year. The fact that profits tumbled by 90% didn’t seem to bother the market all that much.
Indeed, another contributing factor to the rise in the Royal Mail share price has been the change in analyst sentiment towards the stock. Back in November, JP Morgan upped its target price by 48%!
On top of this, you have the general tilt towards so-called ‘value stocks’ over the last few weeks. News of promising coronavirus vaccines has seen traders adopt a risk-on mentality. Accordingly, they’ve thrown money at companies they’d previously steered clear of. Royal Mail is one such business.
Not for me
Despite the change in general market sentiment, I can’t get excited. The parcels division may be doing well but there’s no shortage of competitors striving to take business from the FTSE 250 constituent.
Moreover, the full impact of a recession on the company remains to be seen. With levels of unemployment likely to continue rising as firms of all sizes adapt to the ‘new normal’, there’s no guarantee that people will go on a spending spree when the pandemic has passed. Even if they do, I suspect it’s more likely to be on outside activities and experiences rather than on things that need posting.
Given this environment, wafer-thin margins and a not-insignificant amount of debt, I doubt that the Royal Mail share price will turbocharge peoples’ wealth anytime soon.
Here’s one that might.
A better growth play
Self-proclaimed ‘global identity data intelligence specialist’ GB Group (LSE: GBG) is one of those companies I’ve been following for years and yet never bought. More fool me. In the last three years, its shares have more than doubled in value. By contrast, the Royal Mail share price is below where it was back in November 2017.
Today’s interim results from the business suggest there could be even more gains ahead. Thanks to additional demand from existing customers and contract renewal rates being maintained, revenue rose 9.8% to £103.5m over the six months to the end of September. Post-tax profit more than doubled to £11.8m, while net debt fell from £53.8m to just £2.7m over the period.
Understandably, GB remains cautious about the impact of Covid-19 on business going forward. Notwithstanding, it feels it’s “well-positioned” given the need for all companies to embrace “digital acceleration.” The announcement of a 3p per share interim dividend would seem to back this confidence.
The Royal Mail share price may be showing great positive momentum right now. However, I think it’s likely GB Group will post better gains for holders over the medium-to-long term.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.